Demonetization, its Advantages & Points to Note
Everyone in India and abroad was surprised by the government's announcement to replace existing currency notes of Rs. 500 and Rs.1,000, which accounts for alm . . .
There are various types of loans available for different purposes, and some sound so similar that it is easy to get confused. Such misconceptions can lead to financial mistakes that may come at a high cost. When it comes to loan products, consumers often mix-up home loans and loans against property, also known as a mortgage loan. Some users tend to use the same term for both these loan types, but the fact is, they are two very different loans that serve completely different purposes.
Let's check out what these loan terms actually mean and how they differ from each other.
What is a home loan?
A home loan is a sum borrowed from a financial institution to purchase a house, property or a plot of land for construction of the house. This is a secured loan, in which the lender keeps the house or property as mortgage until the loan amount is repaid. In layman’s terms, the lender holds the title deed of the property, until the loan amount is fully repaid, along with the interest due. After which, the lender formally transfers the ownership of the house property to the borrower.
What is a loan against property?
Loan against property (LAP) is a mortgage loan, where you pledge your immovable assets (personal or commercial) to secure a loan. The advance made is equal to a certain percentage of the market value of the property and can be taken for both personal and commercial use.
One of the key differences between home loan and LAP is how financial institutions handle collateral.
Difference between home loan and loan against property
Let's check out the other factors that make home loan and loan against property completely different from each other.
Rate of Interest
The interest rate on a home loan is much lower as compared to loan against property, as the risk of default is low and the loan is fully securitised. Since the housing sector is critical to the economy, the government provides many benefits like interest subsidy on the loan amount.
The interest rate on loan against property is slightly higher because of the risks involved like higher chances of default and change in the market value of the asset.
In a home loan, a borrower can get finance up to 90% of the value of the property. On the other hand, the LTV ratio of loan against property is up to 60% of the property value. Further, the property valuation is done as per the standards of the lender and value may differ from the market value.
The tenure for both home loan and loan against property is long due to its high loan value. Typically, a home loan has a minimum loan tenure of 5 years and a maximum tenure of up to 30 years.
Whereas, a loan against property has a flexible repayment tenure, having a maximum loan tenure of up to 20 years.
The choice between home loan and loan against property is very simple and straightforward. A home loan is specifically given to purchase a house and a loan against property is more like a type of secured personal loan, where a borrower has the flexibility to use it as per their requirement.
Apart from both being secured loans, there are no similarities and the two serve completely different purposes.
The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.